Does anyone else feel like we suddenly have a new Fed chair?
Imagine if President Biden actually had picked a different person, who kicked off their tenure by giving impassioned remarks about Paul Volcker, talked in press conferences about "as I looked around the table at today's meeting, I saw a committee...determined to use our tools" to return to price stability, and flat-out told reporters that "nothing" would stop the Fed from a half-point rate hike at the next meeting. The press would be having a field day, the markets would be in a tizzy, and we'd all know we were embarking upon a Very Different Era.
But because it's "boring old Powell" doing these things, people either aren't paying attention, or seem to be wryly skeptical that it's all some sort of performance art that shouldn't quite be taken seriously. The doves--who think he's moving too quickly--are going yeah, yeah, watch, they'll be able to do like two rate hikes before having to reverse. The hawks aren't that impressed, either; he talks tough, but the Fed admits real rates will still be negative through the end of next year!
No matter where you come down, though, it's obvious Powell has changed his stripes. He's been trying to tell us for months now, even going back to his and Biden's remarks at his reappointment announcement, which squarely focused on fighting inflation. He gave that vehement response to Senator Shelby on Capitol Hill last month about his admiration for former Chair Volcker: "I think he was...the greatest economic public servant of the era. Shelby: So you're prepared to do what it takes, without any reservation, to protect price stability? Powell: Yes."
Powell was also extremely hawkish in his press conference last week, at least to the ears of anybody who's been following the Fed the last few decades and accustomed to the more circumspect language of Bernanke and, certainly, Greenspan. "Each meeting is a live meeting. And if we conclude that it would be more appropriate to raise interest rates more quickly, then we'll do so," he said. "Live" meaning, "we'll do whatever we need to do, without worrying about whether we've properly prepared markets ahead of time." And this was after the Fed's projections showed they already now plan to do seven quarter-point rate hikes this year, matching the most hawkish views on Wall Street.
But he didn't stop there! Yesterday, in a speech, Chair Powell said, "In particular, if we conclude that it is appropriate to move more aggressively by raising...more than [a quarter-point] at a meeting or meetings, we will do so." He twice said the Fed needed to move more "expeditiously." And asked by reporters what would stop the Fed from a half-point hike next meeting, in early May, he basically said, "nothing."
In response, Goldman now expects two half-point rate hikes--one at the May meeting, and a follow-up one in June--followed by six more quarter-point hikes into late next year. They also expect the Fed to announce in May that they'll start reducing the size of their nearly $9 trillion balance sheet, which is where the bulk of the Fed's easing in response to the pandemic took place.
It's actually pretty stunning how well the stock market is taking all of this. Sure, it's been a rocky start to the year, but the S&P 500 is down less than 6% since the beginning of January and is still up 14% from a year ago. Stocks rallied after Powell's hawkish press conference last week, with the S&P closing out the week with an extremely rare stretch of four 1% gains. And the Dow was up almost 300 points this morning!
Even wilder is the fact that this is all happening as bond yields shoot higher. The 10-year Treasury yield hit almost 2.4% this morning. It was below 1.8% just three weeks ago, and at 1.5% at the end of last year. And yes, people are worried about the flattening two-year versus ten-year yield curve, but the curve is actually steepening if you base it off of three-month bills instead.
In short, this is the starkest hawkish Fed pivot in recent memory. And the markets are taking it in stride. If Powell can pull off this landing, after the pandemic and all the unprecedented havoc it wreaked--if he can pull inflation back down to earth without another nasty recession--then he may well go down in history, like Volcker, as one of the greatest economic servants of his era. And you can sense that he senses that right now. Don't expect him to back off anytime soon.
See you at 1 p.m!